Dominic Coyle answers your questions.

Calculating tax threshold for gifts

My parents need to purchase a house more suitable to their needs. I want to help them purchase this house. The only thing is that I don't really know what amount I'm allowed to give each of them.

What is the threshold amount a child can give to a parent? How much can I give them a lump sum before both parties have to pay tax?

A.B., e-mail

As you are no doubt aware, gifts and inheritances tend to go from parent to child rather than the other way around. The thresholds established for tax purposes are constructed with this in mind.

As such, in 2006 you are able to receive €478,155 from your parents cumulatively in gifts and/or inheritances. Cumulatively means any gifts or inheritances you receive from your parent between December 1991 and now are aggregated to assess liability to capital acquisitions tax.

This threshold increases each year under indexation.

However, when it comes to parents, the situation is different.

Essentially, in situations such as the one you present, gifts from you to your parents come into a lower threshold governing gifts between linear relations. This year, the relevant figure is €47,815. Again, this figure is cumulative.

There is also a separate €3,000 threshold on any gift from any benefactor to any beneficiary in any given year which is not taken into account when measuring gifts against thresholds or assessing liability to tax.

The bottom line for you is that you can gift each of your parents €50,815 (the initial exempt €3,000 and the subsequent threshold of €47,815). Between them, that amounts to €101, 630.

Any amount above this would be subject to capital acquisitions tax, which is levied at 20 per cent.

CAT liability

I have received monetary gifts of €40,000 each year for the past three years from an uncle living in America. What is my CAT liability on this? Is the €3,000 annual exemption allowed to accumulate in the same manner as gifts are accumulated?

Does it make any difference if the uncle has a non-rented holiday/retirement house in Ireland?

Mr J.McK., Monaghan

The key element of capital acquisitions tax (CAT) in Ireland is that taxation is the liability of the beneficiary, not the disponer. As such, it is your tax situation and not that of your uncle that matters when assessing CAT. The fact that he has property here, rented or otherwise is irrelevant.

You have received a total of €120,000 over the three years up to and including this year from this uncle. The relevant threshold for gifts between linear relations - such as from an uncle to a nephew - is €47,815 this year. That applies to the cumulative total of all gifts or inheritances received from this uncle or any other linear relation since December 1991.

The first €3,000 of any gift in any year is, as you point out, exempt from CAT. So, for the purposes of calculating tax, you have received gifts of €37,000 a year or €111,000 in total.

The annual exemption cannot be accumulated in the manner you describe. It works in the same way as your annual exemption to capital gains tax - any exemption not used in a given year no longer applies.

So, assuming you have received no other gifts or inheritances from linear relations - siblings, grandparents, other aunts and uncles or cousins - you have CAT liability on €63,185 (€111,000 minus €47,815). Taxed at 20 per cent, your CAT liability now stands at €13,268.85.

Mortgage rates

I have €45,000 early retirement payment, a monthly pension of €1,000 and a further €40,000 in savings. My mortgage is only €200 per month, but with the continued increase in mortgage interest rates, should I pay off my mortgage now or keep my savings intact?

Ms H.C., e-mail

It is always advisable to take proper financial advice from someone who has sight of the full facts of your situation before deciding on a key financial decision such as this.

Having said that, in very simplistic terms, it is generally a good idea to pay off debts before establishing savings.

You say you have an outstanding mortgage. At the moment, the typical mortgage rate would be around 4.1 per cent and this is expected to rise by half a percentage point to 4.6 per cent by year end and further in 2007.

Unless you are receiving more than that in interest on your savings, it would seem to make sense to pay down the outstanding mortgage.

You are talking about living on a monthly stipend of €1,000.The sooner the mortgage bill of €200 a month is gone, the sooner that money can contribute to improving your general standard of living.

• Please send your queries to Dominic Coyle, Q&A, The Irish Times, D'Olier Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.